Ominous Ring

AS if life wasn't already tough enough for the four cellular phone service operators in Delhi and Mumbai. When, on June 16, the Delhi High Court curtailed the powers of the Telecom Regulatory Authority of India (TRAI) and permitted Mahanagar Telephone Nigam Ltd (MTNL) to provide cellular services in these two cities, it stunned the private operators and, possibly, rang the death knell for them.

Of immediate concern is how fast the public sector MTNL is able to start its services (MTNL says by March 1999), and how much it can eat into the businesses of Bharti Telecom and Essar Cellphone in Delhi, and Hutchison and BPL in Mumbai. And eat into their businesses MTNL will. Simply because it will not suffer from the financial hurdles that private operators face and, as a result, can price its services far cheaper than the Essars and the BPLs.

With its monopoly in fixed line telephony in the two cities, MTNL can cross-subsidise its cellular venture. It has massive infrastructure already in place, so it will have to spend far less than a new entrant to start up the service. For example, it will not have to rent space for setting up cellular dishes all over the cities. It can just use the telephone exchanges it already owns. MTNL is making no secret of the fact that its service will be cheaper than the ones currently available. "We will not charge for the caller line identification facility (which shows the caller's telephone number on the called cellular phone), like the operators here do," says a senior MTNL officer. And that's just the beginning.

What about the licence fees? Private operators in the four metros are, for example, paying over Rs 6,200 per subscriber as licence fees to the Department of Telecommunications (DOT). This is the fixed cost apart from the operating cost that the operators have to incur. The monthly rental charged from subscribers is a measly Rs 156, which does not come anywhere near covering the companies' cost of operation. As of now, a petition to raise the monthly rental to Rs 575 is pending before the regulator. If MTNL does not have to pay the sum to DOT, it reduces its operating cost by a huge margin.

The reaction to the court order from the Cellular Operators Association of India (COAI), which represents the industry before the government, was along predictable lines. "The industry is very disappointed," said T.V. Ramachandran, executive chairman of COAI. "We're bothered about the scales being tilted in MTNL's favour. Otherwise, we are open to competition," said a senior executive with one of the operators.

As the implications of the high court order sank in, top executives of the four private operators affected went into a huddle to study the legal options available. A clearer picture should emerge soon. For the moment, though, COAI isn't ruling out further legal recourse. An appeal before a division bench of the Delhi High Court is being considered, something which will delay the entry of MTNL into the cellular market.

The Delhi High Court's ruling could not have come at a more inopportune moment for the cellular companies. The four companies affected have been plagued with a falling rate of growth of subscribers for the last six months. Airtime usage remains low, the amount of unpaid bills keeps rising. To a large extent, of course, the operators are themselves to blame for their predicament, since all of them seriously miscalculated the potential of the market and have thus gone astray on their financials. The entry of a government-cheaper competitor into the fray could just be the end of the road for the private sector.

FOR MTNL too, the stakes are high. In the prospectus for its GDR issue last December, the corporation had promised investors that it would be getting into cellular services. Indeed, a senior official told Outlook recently that MTNL was actively considering that if the court order went against MTNL, the government would come to its rescue. "After all, we have to keep our promise to international investors that we would be getting into cellular services. We have been knocking the doors of the government for that."

 In fact, the public sector giant took the first steps towards setting up its cellular service even before the high court order. Two months ago, it called for tenders for cellular equipment worth over Rs 4,000 crore after the court permitted it to do so at its own risk. Needless to mention, the vendors will wear a smile after the court order.

Another section of the industry which will welcome the court order is the handset manufacturers because MTNL's cheaper rates could now help the market to grow. For the consumers, too, there cannot be any better news. At least at first glance. "But, is it in the long term interest of the cellular industry?" asks a telecom executive. If MTNL decimates the competition, the consumer would be back to the days of monopoly telecom services, and the consequent lethargy and inefficiency.

The right solution may be to allow MTNL to enter the cellular market, but through a separate company, which will have exactly the same status, and the same terms and conditions, as the private operators. MTNL will then be unable to cross-subsidise its cellular service, and the playing field will be truly level.

However, it is not the Delhi High Court's judgement on MTNL's entry, but its other order that may have a much wider-ranging and long-term consequence on the tele-com sector. The court has decided that the TRAI has no power to entertain the petitions of any licencee if it has a disagreement with DOT, which has provided the licence. This would mean that the companies cannot knock at the doors of TRAI if, for example, DOT encashes their bank guarantees for failure to pay the annual licence fees. Already, companies have been asking for deferment in paying their licence fees.

This clipping of TRAI's wings is sure to scare away investors into the telecom sector. The principal reason for setting up TRAI was that, especially in basic services, the DOT was both laying down the rules of the game and competing against the private operator. It was player and referee simultaneously, clearly an unfair system. TRAI was created to take on the referee's role. Says a senior executive with one of Delhi's two operators: "A strong regulator gives confidence. If the regulator is put on the backfoot, the funding people are suspicious." "Bankers are looking for a stronger regulator. And now this happens," says another executive.

When MTNL announced its plans to get into the cellular business, COAI knocked the doors of TRAI. The regulator stayed MTNL's entry, after which the corporation moved the high court. But the court's agreeing with MTNL is definitely not the last that has been heard on the matter. Says a DOT official: "It's now like the last few overs of a one-day match in Sharjah. It will be interesting to see which team ends up as India—often the losers there."